Benefits and Risks of Spread Betting

Financial spread betting has many benefits but one of the key ones compared to investing is that it allows you to profit if a share prices goes down as well as up.

Spread betting is a way to trade shares and indicies and is a type of trading underpinned by the concept of a derivative – this simply refers to the fact that the value of it is derived in relation to the something else such as equities. In the grander scheme of things, spread betting are one of the easier derivatives to get-to-grips with.

So let’s look a bit further into the main benefits:

  • You can profit even if a the price of a share goes up or down (depending on which way you placed your ‘bet’)
  • There is no stamp-duty to pay unlike when you buy shares through other means
  • There is no commission to pay, all costs for the bet are covered within the bid-offer spread from your chosen provider
  • There is no capital gains tax to pay on your profits
  • You trade on margin so don’t need a full outlay to make your bet (i.e. you only put down a fraction of the full cost such as 10% of the trade)
  • It’s simple to understand, you bet on a pounds per point basis
  • You can go global easily with no FX charges, even betting on a pounds per point basis on US and international shares.

And now looking at the risks or disadvantages:

  • You are not physically buying a share, so there is no dividend income
  • The bid-offer spread is different to what you’d typically see in the market for shares, so this should be factored into your expected profit calculations
  • It’s designed with the short-term in mind. It’s not for investing. All bets have a date for expiry.
  • And the big one is that you can lose more than your initial outlay. Because you are trading on margin – your profits can be extrapolated and so can your losses. If you physically invest in share, your potential loss is limited to the amount you put down in the first place.

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